What is FDI?
Foreign direct investment (‘FDI’) means an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in a Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity. The main purpose of foreign direct investment is to expand the investor's business operations into new markets, gain access to new customers or resources, and/or benefit from lower production costs. FDI can also provide other advantages, such as gaining access to new technologies or expertise, improving supply chain efficiency, and increasing the diversification of an investor's portfolio. FDI is different from foreign portfolio investment (‘FPI’), which is the purchase of securities such as stocks or bonds in a foreign country. FPI is correspondingly more volatile: since it is an investment in financial assets, it can be moved significantly more easily than investment in infrastructure and assets. Therefore, on the one hand, FDI typically requires a significant commitment of resources, and on the other hand, the investor thinks about a longer-term horizon compared to FPI. FDI can be divided into various types.
A common typology is by the form it takes:
- Type 1. Greenfield investment
A greenfield FDI is a type of FDI where a company or investor builds a new business or facility from the ground up in a foreign country. This can involve constructing new factories, offices, warehouses, or other types of physical infrastructure. The term ‘greenfield’ refers to the fact that the investment is starting with a ‘blank slate’ (‘ex nihilo’) and building from scratch, as opposed to acquiring or investing in an existing business or facility.
- Type 2. Brownfield investment
A brownfield FDI is a type of FDI where a company or investor acquires an existing business (‘M&A’) or facility (‘asset investment’) in a foreign country and repurposes it for a new use or expands its existing operations. The term ‘brownfield’ refers to the fact that the investment is taking place on land or property that has been previously developed, often in an urban or industrial area.
- Type 3. Capacity expansion
A capacity expansion FDI is a type of FDI where a company or investor expands the capacity of an existing business or facility in a foreign country. This can involve adding new production lines, increasing the size of a factory, or installing new equipment to increase the production capacity of an existing facility. The goal of capacity expansion FDI is to increase the output of an existing business or facility, rather than building a new one from scratch or acquiring an existing business.
State aid and FDI
Member states of the European Union may provide state aid to FDI projects in the form of subsidies to encourage companies to invest in the EU. The aim of state aid is to create a level playing field for businesses within the EU, to stimulate economic growth, and to encourage investment in underdeveloped regions. State aid for FDI projects is subject to strict conditions and is only granted if the investment will contribute to the economic development of the EU and complies with the European Union and member state legislation on state subsidies.